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Creditor Claiming Trust Assets

In the trust creditor case of the Clegg Trust, 6 Fiduc. 3rd pages 69-79 (O.C. Philadelphia Co. Dec. 2015) the Trust held a life insurance policy and allowed the Trustee to pay the premiums. The trust contain provisions to limit creditors from claiming trust assets of beneficiary debtors under a spendthrift clause. To avoid loss of the federal gift tax exclusion under 2503 of the Internal Revenue Code the beneficiary had a limited right of withdrawal over certain assets and the power over certain assets after the lapse of the withdrawal period under “hanging powers”. The issue was whether a creditor of a trust beneficiary could claim trust assets. The Court cited section 7741 of Title 20 of the Pennsylvania Consolidate Statutes which limits a creditor from reaching trust assets where there is a spendthrift clause. The Court stated that spendthrift trusts are not sustained for the interest of the donee, but because the donor possessed an individual right of property in the execution of the trust; it is the intent of the donor which is important. Therefore, the creditor was not entitled to claim an interest in the trust assets under the spendthrift clause. The creditor then claimed that it had a right to make a claim of the trust assets which the beneficiary had a power to withdraw which did not lapse under section 20 Pa.C.S.A.7748. However, the Court denied the claim as the Court cited the “Power of withdrawal” definition under section 7703, which provides:

“Power of withdrawal. The unrestricted power of a beneficiary acting as a beneficiary not as a trustee, to transfer to himself or herself the entire legal and beneficial interest in all or a portion of the trust property. However, a power to withdraw the greater of the amount specified in section 2041 (b)(2), 2503(b) or 2514(e) of the Internal Revenue Code of 1986, or any lesser amount determined by reference to one or more of these provisions, may not be treated as a power of withdrawal.”

The claim of the creditor was denied.

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